Default rates of corporate bonds plunge to below 1% in 2019

For P2P lending, the average default rate remains similar to last year at around 4%


THE Securities Commission Malaysia (SC) revealed that the default rates in the corporate bond market declined significantly to below 1% last year compared to around 9.4% during the Asian Financial Crisis.

Moving forward, SC said due to the uncertainties stemming from the Covid-19 pandemic as well as slower global growth, several issuance segments may see higher risks to their credit positions.

“Based on our scanning and discussion with market participants, these segments include aviation, oil and gas (O&G), and trading and services.

“These segments are under stress and currently represent around 8% of total corporate bond issuances,” SC market and corporate supervision ED Kamarudin Hashim said via a video conference call last week.

However, he emphasised that issuers within these segments may experience some financial stress in the short term that could weaken their credit positions but not necessarily result in default, as the majority of firms are in the AAA and AA rating categories.

“And in the event of credit deterioration, there should be sufficient buffers before cashflow becomes severely constrained.

“Additionally, several of the issuers within these segments have some form of support in the form of guarantees, be it financial guarantees, corporate guarantees or Danajamin Nasional Bhd guarantees,” he said.

For issuers that have principles or interests or profit obligations within the next six months, SC’s observation based on reports from trustees indicates obligations to fill reserve accounts are being complied with so far. The regulator will continue to monitor the situation as it believes prolonged weakening of issuers’ cashflow will be a cause for concern.

“As investors in the corporate bond markets are also predominantly institutional investors, we believe that in the event of a default, they will be able to pursue various options to preserve their investments through negotiations such as rescheduling, restructuring or vigorously pursuing the contractual right and priority of claims against the issuer,” Kamarudin said.

For peer-to-peer (P2P) lending, he said the average default rate remains similar to last year at around 4%.

P2P operators have been taking proactive steps since the fourth quarter of 2019 such as adapting credit assessment and credit limits.

“At this moment, SC is not considering imposing a blanket moratorium on P2P financing notes. Our approach is for issuers to work together with the operators if they are under stress for possible restructuring and rescheduling,” Kamarudin added.